Bank pumps more money into economy
Updated on 05 November 2009
The Bank of England leaves interest rates at 0.5 per cent for the eighth month in a row and the ratesetters announce another £25bn will be printed.
Added to the £175bn that has already gone into quantitative easing (QE), this is a very, very expensive and lengthy kick-start to the economy.
The cash is intended to encourage banks to lend more money and boost the housing market.
But the stimulus is becoming more expensive and it puts Bank of England governor Mervyn King under scrutiny.
Channel 4 News economics correspondent Faisal Islam said: "The most tangible impact has been on the market for government debt, where the Bank of England has gobbled up the extra government debt, lowering the price the Treasury pays by over a full percentage point.
"Today's news saw a sell-off in that market, with that interest rate increasing by 0.1 per cent.
"The markets clearly see the fact that there will be 'just 25 billion' of QE in the next three months, as a high watermark for the policy (QE to date has been running at £25bn every month).
"David Cameron warned in his Tory party conference speech that QE had to stop at some point, and only then would we see the true demand for British government debt. We are now close to that point.
"There has been a flurry of larger companies that have bypassed the stodgy banks, by raising money from capital markets to reduce bank debt.
"Typically they issue corporate bonds sold to the likes of pensions and insurance companies. This is part of the story of how QE has helped the economy.
"But it is impossible to say what proportion of this extra lending has come as a result of the Bank's experimental policies and what has come from a general improvement in sentiment.
"So QE has disproportionately helped larger companies rather than smaller companies.
"It has helped banks too. It may have helped pump up asset prices around the world. And, indirectly it has clearly contributed to a helpful fall in the value of sterling. Not quite a devaluation, but not a million miles away from it either."
George Buckley, the chief UK economist at Deutsche Bank, told Channel 4 News: "They've done a lot of quantitative easing already. If you look at it relative to the size of the economy, its about 15 per cent.
"It's a huge amount of money and yuo would expect at some point in the future to have a large impact on the economy.
"The problem is that these things tend to operate with hugely long lags so it could take a long time until we know how much of an impact quantitative easing has had."
Tim Drayson of Legal & General investment management said: "It won't be impossible for the government to borrow. They will find that the cost of that borrowing is likely to rise.
"The quantitative easing programme has artifically depressed yields and that's part of the policy to reduce the cost of capital throughout the economy.
"As activity starts to normalise, if the level of inflation is around the Bank of England's target of 2 per cent, you would expect that cost of borrowing to creep somewhat higher."
